Team Performance

Capacity Planning: Theory and 4 Practical Examples

Dovile Miseviciute ·

Passionate content marketer looking to bring better solutions to the project management space. 2020 - Present Marketing specialist at Teamhood. 2014 - 2020 Marketing manager for Eylean.

capacity planning

Any successful business or team runs into the problem of working out how much production capacity they have available to fulfill anticipated future client or customer demand. This is true for all kinds of business, from marketing agencies to in-house software developers, and from laptop manufacturers to industrial design firms. 

All organizations at some point need to make accurate estimates of the resources, time, and people they may need in the short and long term. If you’re struggling to understand the available capacity for your projects, this article should help.

This article defines what capacity planning is, including comparing and contrasting it with resource planning and explaining why the two are different. It then goes on to look at the different types of capacity planning, the benefits offered, and some strategies and practical examples that you might want to use in your organization. 

What is Capacity Planning

Capacity planning is a process organizations use to analyze how much production capacity they need to meet customer demand and is particularly popular in manufacturing and service companies.

Capacity planning helps you to ascertain whether you have enough personnel, raw materials, or equipment to meet forecasted demand. When you expect customer demand to increase, you can use capacity planning to estimate how much additional production capacity you’ll need. It’s also useful when working out if you have the capacity to take on new customers or new projects. 

Capacity Planning vs Resource Planning

Capacity planning and resource planning are often used as interchangeable terms that refer to the same thing. But that’s not the case. These two things are actually quite different.

  • Resource planning is a relatively short-term approach to planning that looks at the resources you currently have and how best to deploy them to meet your current workload. Resource planning is more tactical, in that it looks at tasks within projects and the availability of specific resources to complete them. If this is something you are after, check out the most popular resource management tools.
  • Capacity planning is a more strategic long-term planning approach that looks at matching supply and resources with forecasted future demand. It may be that companies are turning down potential work for the lack of specific equipment or skills, for example, when adding those to the company would allow them to take on more clients. Capacity planning takes a broader overview of projects across a department or organization and everything that might be needed to deliver them.

Capacity Planning Benefits

There are many potential benefits to capacity planning in an organization. Here are some of the most commonly mentioned:

  • Delivering projects on time and on budget. Good capacity planning means that you have the right resources available for each project, ensuring that you deliver products on time. It aids your team in managing the time constraint and staying within budget.
  • Reducing operational costs. More accurate budgeting means that you invest the right amount in the resources you need, which minimizes waste and reduces costs. Thus easing your cost-tracking efforts.
  • Increasing employee motivation and retention. Many skilled professionals leave their jobs due to overwork and burnout. Better resource planning helps reduce overwork and avoid burnout, while also ensuring that skilled employees get put onto the appropriate projects. All of which help keep employees motivated and reduce employee churn.
  • Managing skills and uncovering hiring needs. Planning capacity enables you to manage and take stock of the skills available in your team or in your organization. You’ll know when you’re short of certain skills and which skills you need to hire for. 
  • Allocating resources more effectively. Allocating resources more effectively is a huge benefit for any organization, and leads to most of the benefits already mentioned, which can help reduce costs and increase operating margins. Here is a workload displaying the occupancy of human resources across different projects.
capacity planning workload

Different Types of Capacity Planning

Capacity planning typically focuses on three main types, depending on the organization, the industry sector, and the type of project involved. These capacity planning types are:

1. Workforce capacity planning

This type of capacity planning strategy is about ensuring you have the workforce needed to meet demand. Do you have the right number of employees with the right skills and hours available to complete the project to the best of your ability? 

This type of planning tells you if you have the right skills in the right places, and whether you need to hire more employees or downsize, depending on anticipated demand. If you need to hire, this type of planning also includes accounting for the time it takes to recruit and onboard new people.  

2. Product capacity planning

This revolves around ensuring that you have enough raw materials in a manufacturing process to make enough products to satisfy anticipated demand. Alternatively, this type of planning is to ensure that you have enough products available for an online or brick-and-mortar store, particularly during periods of high demand. 

3. Tool capacity planning

Do you have the right tools or equipment for the job? That’s what this type of capacity planning seeks to ensure – that you have the equipment to fulfill the anticipated level of demand for orders. The tools and equipment in question can include anything from machinery and vehicles to assembly line parts and anything else you might need to create and deliver your product or service in a timely manner.

capacity planning

Capacity Planning Strategies

There are four capacity planning strategies that organizations can use to optimize their use of resources:

  1. Lead strategy planning. This is the process of increasing production capacity in anticipation of higher demand. Simply put, this strategy aims to get ahead of the demand and prepare for it.
  2. Lag strategy planning. The process of only increasing production capacity once you experience an increase in demand in real-time. A more conservative approach to the first strategy is used when the team is unsure or unaware of the rising demand.
  3. Match strategy planning. A combination of lead and lag strategy planning, in which you slowly increase capacity in small increments until you reach the desired resource utilization.
  4. Adjustment strategy planning. This strategy involves using planning tools that analyze multiple variables, such as demand forecasts, real-time sales data, and seasonal trends. Doing this is designed to adjust capacity more accurately in advance of demand. Just like the previous one, this strategy also uses a combination of approaches depending on the findings. 

Feel like your projects are always falling behind schedule? Check this infographic we made on the most common reasons behind it.

Some practical examples of Capacity Planning

There are lots of ways that capacity planning can be used. Here are a few practical examples.

Example no 1

For this first example, let’s take a look at the hospital emergency department when doctors are on call. If demand increases rapidly during a given shift, administrators may call in additional doctors and nursing staff to ensure there are enough resources to cover patients’ needs. Giving us an example of Lag strategy planning.

Example no 2

Contrary to that, retailers are well aware of their high and low seasons and prepare accordingly for them using Lead strategy planning. During sales periods, it’s sensible to anticipate increased footfall on the shop floor. At such times, managers will hire seasonal workers to cover the rush. Anticipating higher customer traffic allows them to allocate extra resources ahead of time.

Example no 3

Now let’s use the example of a food manufacturer to cover multiple different capacity planning types. Say a food manufacturer has the opportunity to supply a new retailer and needs to understand the impact of increasing production capacity on their resource requirements. 

The manufacturer will need to secure more raw materials to produce higher volumes – an example of product capacity planning. They will also likely need to add production line equipment – an example of tool capacity planning. They must also recruit more people to operate that equipment – an example of workforce capacity planning. Successfully managing all types of capacity will be crucial in this case for the manufacturer’s success.

Example no 4

Similarly, an advertising agency needs to know if it has the capacity to take on any more clients. With workforce capacity planning, they’re able to predict what skills they need and to hire new talent where those skills are lacking. At the same time, they will have to use tool capacity planning to ensure they have additional laptops and workstations for the staff they’ll need. Looking at the whole picture here will allow them to succeed in both – attaining more clients and strengthening the team.

Continue learning: Accuracy in project planning timeline

How to Choose the Best Capacity Planning Tools

Now you’ve read this introduction to capacity planning, you should have a good idea of the potential benefits and uses in your organization.  

There are several good capacity planning software tools in the market, and the best approach is to review them and ascertain which are best suited to your needs. That’s why we put together this useful comparison of some of the leading capacity planning software tools currently available.

If you are after a free and intuitive project management solution that can aid in capacity planning efforts, take a look at Teamhood. Here, you will be able to plan out projects in Gantt charts, track progress on Kanban boards and collaborate with your team right where work happens. Use it with unlimited number of team members completely free.

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